BBT BB and T Corporation

   (FROM THE WALL STREET JOURNAL 9/26/15) 
   By Vito J. Racanelli 

Equities sank last week, as markets continue to be roiled by the Federal Reserve's Sept. 17 decision to hold interest rates at zero, and the ensuing uncertainty about the timing of a rate rise.

The broad market fell 1.4%, with the selloff intensifying Friday, when biotech stocks tumbled sharply in the afternoon. There was no particular catalyst beyond the deterioration in sentiment and a desire by some investors to take down exposure to riskier assets, like small-caps and biotechs, traders say.

Affirmation of a hike this year by Fed Chair Janet Yellen -- in a speech after the market closed Thursday -- gave stocks a brief boost Friday, but the impetus petered out. Additionally, a strong earnings report from Nike (ticker: NKE), a component of the Dow Jones Industrial Average, pushed the Dow to a gain on Friday.

Last week, the Dow lost 0.4%, or 70 points, to 16,314.67, and the Standard & Poor's 500 index fell 1.4%, or 27, to 1931.34. The Nasdaq Composite dropped 3% to 4686.50.

The market is suffering from the aftershocks of the Fed's decision, says David Lefkowitz, senior equity strategist at UBS Wealth Management Americas: "It's still trying to digest what the Fed is trying to communicate."

In her remarks, the Fed chair suggested overseas developments wouldn't be important enough to have an impact on the decision to hike later this year, seemingly backpedaling from the Fed's previous statement.

From week to week, the Fed's message seems to be different, creating uncertainty, adds Rick Seto, a managing director at Flaherty & Crumrine. Investors need greater clarity to make fundamental investment decisions. "The only people making money now are day traders," he adds.

"The U.S. is not a zero fed-funds-rate economy now," says David Seaburg, head of sales trading at Cowen. Friday, the Commerce Department revised its estimate of second-quarter gross-domestic-product growth to 3.9% from 3.7%. The fed funds rate -- the overnight lending rate banks charge one another for funds maintained at the Fed -- is currently 0% to 0.25%.

"Rate liftoff would give confidence in the American economy. The Fed needs to move in December," Seaburg says.

One bright spot was Nike, whose shares rose 9% Friday to $125. After the close Thursday, the giant sportswear maker posted a 23% jump in quarterly profit and a 5% rise in revenue, with sales gains of 30% in China. That partly assuaged worries about a Chinese economic slowdown. Markets don't fully trust the official economic data coming out of China, so Nike's figures are a boost to confidence about the Middle Kingdom.

The market is probably in for more seesaw action through seasonally weak October. "People forget that when the Fed started this extraordinary monetary-policy ease it was bumpy going in. It's going to be bumpy coming out," says Keith Bliss, director of sales at broker-dealer Cuttone.

This week sees at least two important September data points: the ISM manufacturing report, out Thursday, and Friday's U.S. employment report.

Boring Is Beautiful at BB&T

In times of market turmoil, "boring" stocks become more interesting. Regional bank BB&T is one of those stocks. The $27 billion market-cap company is a steady eddie, a well-run southeast regional bank whose shares have traditionally been attractive to income-seeking investors with a long-term outlook. More's the case now.

The stock (BBT) is down, along with other financials, by 15% this year, to $35.68 from a high near $42. The shares, which yield 3%, could approach the old high over the next two years, as earnings growth improves. That would mean a double-digit annual total return, even if the market continues to bounce around. As with all banks, higher interest rates would help, but this bank is more diversified than investors seem to realize and has other levers that should help grow profits next year.

Financials are down because the Federal Reserve's intention of raising rates has moved much more slowly than the market has expected. Banks in particular have fallen harder than the market since its swoon began in mid-August.

Higher rates would help boost net interest margins -- the difference between the interest paid on deposits and what the bank gets on loans -- and push up profits. BB&T's margin has suffered quarter after quarter, just as at other banks. "BB&T gets lumped in with other traditional banks, but it isn't as sensitive to rates as most regionals are," says Robb Parlanti, a portfolio manager at Burke Lawton Brewer & Burke Financial Advisors. The firm has been buying BB&T shares for clients.

Traditional branch banking makes up just 44% of BB&T's net income, with the rest divided among mortgages, car loans, commercial lending, insurance, and wealth management.

Parlanti also likes that BB&T is a growth story. The Winston-Salem, N.C. --based bank has been expanding its footprint with recent acquisitions in Pennsylvania, for example. Growth through acquisition can be risky, but BB&T has a strong track record of accretive growth through relatively small, bolt-on acquisitions. The bank has proven itself adept at cutting costs, taking share in new markets, and growing earnings this way, Parlanti adds.

Analysts expect BB&T to earn $3.28 per share next year, up from an estimated $2.67 this year, as the bank fills out its footprint, thanks partly to additions in Kentucky and Pennsylvania. In 2014, BB&T earned $2.75.

The price/earnings ratio, at 11 times forward EPS, is undemanding, considering its median P/E is 13. Earnings growth has been lumpy, but the bank has been consistently profitable, even through the 2008-09 financial crisis. BB&T earns a better return on assets, 1.16%, than the 1.07% average of its peers, according to Bloomberg. It's ROA is also higher than other well-known regionals, including Fifth Third Bancorp (FITB) and KeyCorp (KEY).

"BB&T is a well-managed tight ship," Parlanti adds, with loan losses and nonperforming assets moving down steadily since 2010. Given a dividend that's grown an average 10% since 2010, ". . .it's a nice stock to have in a diversified bank portfolio."

BB&T stock won't be a moon shot. But with the way the market's acting and the prospect of more of the same, it doesn't have to be in order to make investors happy.

Demandware's Danger

Demandware (DWRE) is as sexy as BB&T is boring. The Burlington, Mass.-based company sells cloud-based services to retailers and consumer-brands companies, for the most part. Its products and software are used by companies to develop and manage e-commerce across various platforms, including online, in-store, mobile, and social networking.

E-commerce sales are expected to grow about 20% annually through 2018. Demandware, whose products are well respected, is growing faster yet, with annual revenue up an average of 50% over the last five years, to $160 million in 2014 from $21 million.

What Demandware lacks, however, after nearly a decade in business and three as a publicly traded company, are profits, though analysts forecast $8.6 million next year. Investors should beware all the same. Even after falling from $76 in July to a recent $52.17, shares trade at a sky-high 233 times projected earnings.

Losses have widened steadily, to 78 cents per share last year from 23 cents per share in 2012. The first half of 2015 has been no better, with a loss of 71 cents versus 49 cents in the year-ago period. The figures are based on generally accepted accounting principles.

And Wall Street's 2015 projections seem optimistic, given they have consistently proved too bullish since the company came public at $16 in March 2012. There's no reason to think the profit-poor situation has changed. Moreover, the consensus uses adjusted non-GAAP EPS, leaving out various noncash expenses, such as stock-based compensation packages, which are substantial at Demandware. That's common enough for high-tech companies, but these compensation costs aren't going to let up any time soon. As of Dec. 31, there was another $62 million in yet-to-be-recognized stock compensation due over the next three years.

Demandware's other expenses are lately outpacing sales. In the second quarter, subscription sales rose a blistering 45% from a year ago, but costs grew at a 60% clip.

Demandware gets the great majority of its revenue based on a subscription model, taking a small percentage of customer sales over its platforms. It relies heavily on its ability to add new clients and create new services to further integrate clients into its system. But attracting new customers and developing new features has been increasingly expensive for Demandware, says David Trainer, president of New Constructs, an independent accounting research firm.

The market eventually wants profits, but given intensifying competition, it's hard to believe Demandware will generate as much as is already discounted by the high share price, says Trainer, who calls the stock significantly overvalued. Deep-pocketed rivals include IBM (IBM), Oracle (ORCL), eBay (EBAY), and SAP (SAP), among others, want a piece of this growing industry. So how would cost growth subside much? Moreover, Demandware is the lower-price alternative and has less to give on margins.

Some key metrics have slowed. Annual customer growth fell to 31% last year from 35% in 2013 and 50% in 2012. The backlog increase dropped to 37% last year from 67% in 2013. While many companies would love these numbers, the trend is going the wrong way for Demandware's valuation.

The stock is vulnerable to another quarterly miss. Part of the drop seen so far was due to a second-quarter EPS miss, when shares fell 12%. Average subscriber revenue grew 4% in the last quarter from the year-ago period, much less than the 13% average of the previous five quarters. That could mean Demandware is signing up smaller customers, or prices are eroding.

Demandware did not respond to a request for comment.

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